Broker Check

The Weekly Update for 9/30/2022

| September 30, 2022

The Smell of Fear!

Like many things in life, the more things change, the more they stay the same.

Below, I am pasting in a “Special Update” I sent our client family on 12/26/2018.  It is about our wicked smart engineer client, Nate G.’s, investment strategy.

Note the Volatility Index (more on this below) back then was 36.07.  As I write this update on Thursday, 9/29/2022, the same index rests at 33.15.

In an ongoing effort to “not make our client family poor” we will need to see the valuations of Corporate America pause its downtrend, stabilize, and then start a trend up before we start taking advantage of the current, and reasonable, valuations with the cash we have raised earlier this year.

Special Update 12/26/2018

It is likely not news to you that in the last 16 business days the valuations of Corporate America had a fast and vicious melt down. 

On 12/3/2018 the Valuations of Corporate America, as measured by the S&P 500, stood at 2,790.37.  

On 12/24/2018 the S&P 500 closed at 2,351.10.  A reduction in value of -439.27 or -15.74% in about three weeks!

On 12/3/2018 at S&P 500 2,790.37 we sat well above my "Exit Strategy" first action point, "should it be reasonable and prudent to act", of 2,545.55.

With all the positives in the background, i.e. record corporate revenues, record corporate profits, growing corporate earnings projected combined with other economic indicators flashing growth, it seemed to be a fear driven sell-off growing on itself with each tick down in prices.

Knowing that, I would like to share a real-life client experience with you from 1987.  Maybe I put too much emphasis on this experience, but at the end of each episode since then it has proven to be a "WOW! HOW ABOUT THAT" moment!

I will make this brief, as I am a slow typist!  In the 1980's it was normal for people in my business to make sales call to people we didn't know, i.e., cold calls.  I always thought it was a good idea to call people at home during the time of a big sports event, like the night I cold called Nate G. (I can't use his last name for privacy rules) during the World Series.

In our call Nate told me he only invested in blue chip stocks, and he only bought when he could "smell fear in the air"!

I asked Nate what that meant, and he said give me your name, phone, and address and "I will come to your office someday when I smell it!"

One day in October 1987, the receptionist let me know I had a visitor up front who wanted to meet me.  Keep in mind I was associated with a big-time fancy Wall Street firm on 17th Street in Denver at that time.  As I entered the reception area, there was one person standing in the middle of the room.  It was a man in his mid-50's with a long ponytail, girl watcher wrap-around sunglasses, blue jeans with a few holes, a white tee shirt that was a little too tight and the boots he was wearing were some of the gnarliest work boots I have ever seen.

As I entered the room, he lifted his sunglasses to the top of his head and he said "Jim, I am Nate G., you called me about investing a long time ago and I am ready to invest today."

I told Nate I remembered the call and that in my gut knew I would meet him someday.  We went to my office and Nate had his check book and a list of about 20 companies he wanted to invest in.  Of course, the markets had been in turmoil and so I reminded Nate of his comment to me about "smelling fear in the air".  Was today the day?  And, as he had promised me, I wanted to hear how he thought fear smelled!

Nate closed my door and started telling me about the FEAR index, or VIX as we call it.  The VIX is a ticker symbol for The Chicago Board of Options Exchange Market Volatility Index.  The VIX measures volatility implied through the S&P 500 index options.

Let me share a short story from the past.  Nate told me he only followed one indicator, the VIX, and in all the years he used the strategy the only time he would invest was when the VIX closed above 30.  It turns out Nate was a wicked smart engineer and he kept really good statistics on the VIX.  He took out his record book and showed me his stats where he calculated that, for him (this is not my or any firm’s research) that when he bought when the VIX closed above 30 the S&P 500 was up one year later 91% of the time.  A good stat to remember, I thought! Based on my research on Worden Brothers ( over the years, it appears to be accurate for the time periods dating back to the 1980’s.

So, as I watched the valuations of the S&P 500 melt down on this Christmas Eve day, I checked the VIX and it was trading at 36.07.  For a moment I thought of Nate and chuckled thinking maybe this was his Christmas gift to me.  And, because of all the positives versus a few really serious concerns, like world debt load of poor quality, I still thought this was a very strong reason to hold still on my "Exit Strategy" for the moment.  We are not abandoning the Exit Strategy; however, we are thoughtfully reviewing it daily.

For now, I remain on high alert and in my gut, which is usually correct, I just feel selling at these values would be the wrong thing to do.  

I am interested in your thoughts, comments and discussion.  Call me, email or just stop by the office and say "HI"!

Jim Lunney, CFP®


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly. 

It is not possible to determine the top or the bottom of the market. Investing in the market involves risk, including fluctuating prices and the uncertainty of return. There is no guarantee that the investment strategy discussed will be successful.

Trailing PE: Trailing Price to Earnings is price divided by trailing earnings per share for the past 12 months.

The CBOE Volatility Index (VIX) is meant to be forward looking, showing the market's expectation of 30-day volatility in either direction, and is considered by many to be a barometer of investor sentiment and market volatility, commonly referred to as “Investor Fear Gauge”.